InsiderOnline Blog: December 2012

Relative to the economy’s performance under the current policy, we find that total output and income would decline by approximately $105 billion in 2012 and by an average of $196 billion per year over 2013–2022. The decline in economic output is consistent with prevalent recessionary concerns. The slowdown in real output occurs because:

• Higher tax rates on investment raise the cost of capital investment, and higher tax rates on labor income reduce the incentive to work and supply labor in the U.S. economy. Over the long run, the decline in private-sector investment would reduce the capital stock, leading to slower output and labor supply in the U.S. economy.

• Gross private-sector investment would decline by an average of $126 billion (4.1 percent) per year, reducing real capital stock in the U.S. economy by an average of $229 billion (1.2 percent) per year. The reduction in private-sector investment and capital services over the long run would reduce the labor supply at different economic margins: Private-sector employment in the U.S. economy would fall by an average 1.1 million jobs (1 percent) per year, and Americans would work 2 billion fewer hours relative to baseline levels.

• The President believes his tax proposal will increase federal revenue by an average of $160 billion per year. The results of the dynamic simulation indicate that the President’s proposal would achieve only about $68 billion per year—less than one-half of the President’s projection. The dynamic result is due to a smaller tax base commensurate with the smaller economy. For example, fewer hours worked and lower real wages result in less federal income and payroll tax receipts. [The Heritage Foundation, December 14]